EDITORIAL: Much ado about interest-rate cap

Many consumers complain that banks charge excessive revolving interest rates on credit card loans and cash-advance card loans. Some lawmakers appear to agree and have proposed reducing the revolving rate ceiling. This is the third time lawmakers have tried such a move since 2005, but will they have any better luck this time?

The maximum annual interest rate permitted under the Civil Code is 20 percent. That is why most banks have set their interest rate on revolving credit at about this level. Many cardholders think it is unreasonably high, being well above the average lending rate of 2.2 percent and the average savings rate of 0.8 percent as of Sept. 30.

Late last month, the legislature’s Judiciary and Organic Laws and Statutes Committee approved the first reading of a draft amendment to Article 205 of the Civil Code that would cut the maximum lending rate from 20 percent to 16 percent, saying this would ease the financial burden on debtors.

However, because of opposition from some lawmakers and the Financial Supervisory Commission, the committee has referred the amendment for cross-party negotiation, which means it will be delayed unless a consensus can be reached quickly. With the current legislative session due to end in about one month, the chances are low that the amendment will proceed to the second and third readings any time soon.

Putting more pressure on lawmakers to take faster action sounds like a clever move. The longer the amendment stays in the legislature, the more likely lawmakers are to yield to pressure from government agencies and lobbyists, who say it would hurt banks.

A benefit of the proposed amendment is that the planned rate-cap change would apply to all kinds of lending — including credit and cash card loans, unsecured loans, car loans and housing mortgages.

The amendment’s opponents think it is inappropriate to lower the ceiling to relieve heavily indebted, low-income cardholders, saying that the move would trigger concern in the domestic banking environment.

There is no empirical evidence showing that a rate-cap change will severely dent banks’ profitability. Considering that banks are still able to grant corporate and syndicated loans and mortgages at very low lending rates amid cut-throat competition, their unreasonably high revolving interest rates seem exorbitant.

The commission warned that a drastic rate-cap change may force banks to cut credit lines for some low-income borrowers and small businesses, forcing them to turn to pawn shops or loan sharks, which often have connections to organized crime. No one wants people to turn to illegal moneylenders because of restrictions on legal financing. However, maintaining the peace and fighting illegal debt collection activities is the government’s responsibility. Potential crime is not a rational argument against cutting the ceiling.

The government’s job is not to help banks make money at the expense of indebted cardholders and it should work with lawmakers to devise a special law to regulate credit and cash card loans if it thinks there will be adverse side-effects. The goal should be to establish a mechanism where interest rates are transparent so that there are no hidden charges.

Lowering the revolving-rate ceiling might be bad for banks, but it would be a big help for indebted cardholders. If the amendment is shelved by lawmakers, the question has to be asked: Why did they not pass it? What alternatives are there to protect consumers from predatory lending and how can the problems be solved without subjecting all consumer loans to the same law?